How to make sure your contractors are truly backed by insurance

A certificate of insurance is not a binding document and you should never rely on it as evidence that a contractor has obtained insurance.

“At the end of the day, a certificate of insurance doesn’t legally mean anything,” says Josh Daly, risk management consultant at Gallagher. “That’s why you need to be backing up your certificates of insurance by requesting copies of policies or declaration pages to prove coverage.”

This is just one of the ways your business should be reviewing certificates of insurance.

“While there tends to be more focus on this in hazardous industries like construction or energy, it’s important for transportation, health care and others as well,” says Dereck Malzi, area assistant vice president at Gallagher. “It can affect anybody that contracts with another, paying somebody else for their services, such as manufacturers who have someone distributing for them, a school district with a food service vendor or a professional service provider with a maintenance agreement.”

Smart Business spoke with Daly and Malzi about what you should know about insurance certificates and contractual risk transfer.

What could happen to a business that doesn’t review its certificates of insurance?

A worst-case scenario could be that you receive a certificate of insurance that claims somebody has general liability insurance and there’s a bodily injury or property damage claim that results from a subcontractor’s actions. However, once a claim is filed, you find that there is no insurance in effect. So, most likely, you’re picking up that exposure because of somebody else’s negligence.

What should you be looking for with contracts and certificates of insurance?

All contracts should be reviewed by your lawyer, risk manager and insurance broker before you sign so they can point out areas of concern. But just because you’ve done business with a contractor for years doesn’t mean they have coverage.

In general, your risk manager or insurance department needs to know the contractor’s name, when the work will start and finish, what type of insurance is required, if you will be added as an additional insured on their policy, when the insurance policy will expire, and the contact information of whoever is in charge of the certificates of insurance and/or signing off of contracts. You also can state that you require a 30-day cancellation notice if that contractor’s insurance is cancelled.

Make sure you have a mechanism in place so that when something is going to expire, you request a new certificate of insurance, and you should request — at a minimum — the policy declarations of each of those policies to verify that coverage is in effect. Another best practice, especially in a hazardous industry, is to request a copy of the language of your additional insured status. In some cases, you’ll be listed on the certificate of insurance as an additional insured, but the policy states that additional insured status is only for scheduled entities. If your company isn’t listed in the schedule, you don’t actually have that status.

Another thing to watch is how the general liability policy is written. Is the limit written on a per policy, per project or per location basis? This is important because, let’s say, the company has a $1 million policy aggregate, but it has had five other claims. If it’s written on a per policy basis, there may be no money left to pay claims that happen on your premises. The better scenario is a policy written on a per project basis, so every project has the full amount of the policy limits. A policy written on a per project basis will cost a little more, so not everyone has it.

How should companies review and maintain these records to limit risk?

It’s about continual upkeep. At the end of the day, it’s a record keeping exercise, and the better you are at finding a way to manage that exercise, the more you can limit risk.

Your insurance broker can help you set up a program to review the contracts and certificates of insurance. While larger organizations have certificate tracking software, most of the time, a risk manager or insurance department will track this, via spreadsheet or another internal mechanism, to make sure coverage doesn’t lapse. And like anything else, people leave, retire or responsibilities change, so knowledge could shift. If you’ve got some new people, it might be time for a refresher course.

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